Well, okay. I admit the title of this piece is a blatant example of hyperbole. I just wanted to get your attention. But bear with me for a minute, and you will see what I mean.
In 2005, Congress passed into law “The Bankruptcy Abuse Prevention and Consumer Protection Act”. The chief cheerleader for this bill was Senator Hatch. At the time the Senate passed it, Hatch was quoted as saying, “This bill is about fairness and accountability. Bankruptcy claims have skyrocketed since the last major bankruptcy reform bill in 1978. We all know about the abuses of the system. Well, that is about to change for the better… I do believe (the bill) will reduce the number of fraudulent and abusive filings and help educate consumers to keep their financial houses in order.” The main purpose of the bill, which was heavily lobbied for by banks and other financial institutions, was to make it more difficult to file for bankruptcy.
Sounds great. However, the opponents of the legislation had a warning for us. They reminded us that bankruptcy laws, among other things, provide an important check and balance against fraudulent loan practices. If there is a chance that investors won’t get their money back because a consumer is lured into signing up for a loan they don’t have the ability to repay, the possibility of a bankruptcy declaration would help put the brakes on such practices. The potential of the borrower declaring bankruptcy forces lenders to be more careful in approving loans and more truthful about the risks. They also argued that despite the title of the bill, the specifics of it were long on roadblocks to bankruptcy filings and short on protecting consumers. The critics claimed the proposed legislation would shield dishonest financial institutions from the consequences of their own unwise and deceptive lending practices.
Fast forward two years, and the opponents of the 2005 bankruptcy reform legislation sound eerily prophetic. One cannot argue that the explosion of the type of teaser mortgages that have been the root cause of the massive increase in foreclosures started about the time the bankruptcy law was passed. Financial analysts have marveled how mortgage investors demanded amazingly little in risk premium for what was, in retrospect, a disaster waiting to happen. That “irrational exuberance”, as Alan Greenspan puts it, was unquestionably encouraged by the fact that the victims of these loans would find it more difficult to declare bankruptcy.
Senator Hatch and other conservatives seem to think it is solely the responsibility of the consumer to detect and protect themselves from fraudulent loan practices. An alternate view is that you shouldn’t need a PhD in finance to get a loan; that a middle class blue collar worker with a trusting nature and a moderate level of education should be protected from con men in pinstripe suits who would take unfair advantage of a young family’s dream of owning a home.
I think Senator Hatch’s heart is in the right place. I was gratified to see that he not only voted for the SCHIP bill expanding health care for children, but publicly chastised President Bush for being on the wrong side of that issue. However, the 2005 bankruptcy reform bill poses a question. Should the government’s primary responsibility be to protect big business from the consumer, or to protect the consumer from big business?
With all due respect, I think we know which side of that question Senator Hatch comes down on.